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Aug 30 Wonga on the brink of collapse

In news that has saddened almost no-one, Britain’s largest payday lender is on the verge of collapse. Wonga has long been the poster child for the predatory lending practices and callous business culture which make the short-term loan industry one of the most disliked in the world.

Reports state that Wonga has lined up accountancy firm Grant Thornton to step in and handle the administration of the firm if it falls into insolvency following a wave of claims relating to loans taken out before 2014. It is alleged by the claimants that these loans purposefully targeted vulnerable people with marketing campaigns and fleeced them with ludicrous interest rates and repayment terms.

2014 was an interesting year in the history of Wonga and an instructive one when looking at the current state of the company. As well as imposing interest rates that have been described as “daylight robbery” and “legal loan sharking”, Wonga was forced to pay £2.6m in compensation to 45,000 people after it was found guilty of sending letters from non-existent law firms to chase people for money.

Indeed, Wonga’s behaviour was so bad in 2014 that the government introduced tougher rules and price caps for payday lenders as a direct result. The regulation was not unreasonably harsh but it has dealt what looks like a fatal blow to many payday lenders, rather proving the point that these were business that could only survive in the first place by exploiting people unfairly.

If Wonga was to fall into administration it would represent a remarkable fall from grace; the company was once valued at £780m but is worth only just over £23m today – and that could be set to fall to almost nothing. It is tough to see what company would take on the debts given that the main asset – the value of its loans – is beset with the previously mentioned legal challenges.

The situation is so dire that a recent injection of cash from shareholders actually managed to prompt a fresh new series of claims against the company from wronged customers. This is the exact opposite of the steadying effect more cash is meant to inspire.

The lesson for investors to take from this is to stay away from Wonga and similar payday lending companies at all costs. This is an industry which seemingly operates by directly preying on people when they are experiencing hardship, hopelessness and misery and it is only a matter of time before the industry is legislated out of existence. For reasons both ethical and financial, the likes of Wonga are companies to leave out of an investment portfolio.